Workers’ Comp via Employee Leasing: Contractor's Time bomb?
- By Dennis Slabaugh ARM CRIS
- •
- 07 Jan, 2019
Ever since the adoption of the Tax Equity and Fiscal Responsibility Act of 1982, PEO s and employee leasing arrangements have grown dramatically. It is estimated that some 3 million employees are working under such an arrangement. For many industries leaving all the employment issues and workers' compensation insurance procurement behind is practical and relatively free of pit-falls. But for the construction industry, when you begin to peel back the layers, you will find many potential coverage issues and that ticking sound. If you are a contractor using employee leasing to obtain workers’ compensation or maybe you are using subcontractors that obtain their workers’ comp from this type of arrangement. In either case, please continue reading.
Under such an arrangement there may be some savings to be had and you cannot argue with the convenience of having your workers’ compensation premium payments tied directly to your actual payroll each pay period. But, please do not rest on your laurels with the assumption that there are not any trade-offs for that convenience. The fact is, there are….. Big trade-offs that can put you out of business financially unless you have prepared for and covered the two major gaps this arrangement creates.
The vast majority of workers’ compensation policies insuring the Leasing company and the “leased contractor employees” leave an exposure to a workers’ compensation claim if an uninsured subcontractor is hired or if there are employees hired outside of the leasing contract (temporary workers, etc.) For employees to be covered, they must be listed on the policy / contract with the leasing entity. And with the specific exclusion of employees of subcontractors these policies contain, forces you to either have an additional standalone policy (on an “if any basis”) or precludes you from ever using a subcontractor (you cannot cover gaps in their coverage) and from never having an employee on the job that is not listed on your policy.
We have recently witnessed that “time bomb” go off. A fully insured contractor / owner / builder hired a subcontractor who uses employee leasing for obtaining his workers’ compensation coverage. And while the owner never authorized the subcontractor to utilize ANY sub-subcontractors for this job, he did so anyway. And while in good faith he believed the sub-subcontractor had proper workers’ compensation coverage in place, (the policy or “qualifier” he claimed to be covered under also had coverage through employee leasing and after-the-fact denied that the two employees were part of his company) the fatally injured worker appears to not have any coverage. That leaves the Owner as the “statutory” employer of this worker and his injuries under the law. Fortunately the owner has a conventional policy that could respond not leaving him in financial straits, but the impact on the cost of his policy for the next three years could amount to tens of thousands of dollars of additional premium due to Experience Modification Factor escalation. Had the owner relied upon employee leasing workers’ compensation coverage, there would be no coverage to respond and would be financially catastrophic.
We understand that for many small contractors especially those newly in business obtaining conventional coverage can leave few alternatives other than the Florida Workers’ Compensation Joint Underwriting Association (FWCJUA). But even a 30% surcharge for a year or two may be money well spent rather than leaving you open to that financial time-bomb of an uninsured million dollar claim. Think about this very carefully when you accept coverage from a sub with employee leasing coverage or you decide this is the way to go for your coverage. While there may be ways to attempt to manage this risk, they are not very practical. Those include requiring a daily roster of any employee you allow on your jobsite and a phone call or fax to the carrier providing the coverage for employee leasing. Or, not allowing any subcontractors or sub=subcontractors on the job. But most of us familiar with the construction industry in Florida know that both of these ideas are not practical and on a busy construction project you never know who is working for whom. I have seen more than once a phantom employee pointing to another contractor on the job claiming they are their employee for the purpose of filing a work related claim. And don’t forget that once a worker files a Petition for Benefits (PFB) against your company, that “claim” will not just go away until it goes fully through the entire process of PFB filing, mandated mediation and setting for final hearing. All of those steps in the process require covered legal representation and expense.
While many industries outside of construction (where subcontracting and a tough labor market are the rule rather than the exception), obtaining workers’ compensation through employee leasing may not have any real pitfalls and no ticking time bomb. But, for those of you in the construction industry, your agent will need to put in the extra effort and provide expertise “you can count on© and provide you with “business peace of mind© when it comes time to evaluate and place your workers’ compensation coverage.
Our recommendation: Even if you have coverage afforded by a leasing arrangement, procure your own stand alone workers' compensation policy form any available source. It is the only way to fill the gaps in coverage for uninsured statutory employees.
Another major governmental agency made the headlines locally among the mounting number of organizations falling victim to cybercrime or other forms of data breach or system intrusion. While the small time phishing emails continue to flood our mail boxes, serious hackers are making off with billions of dollars all around world. The City of Naples last week was caught in a type of social engineering where someone posing as the legitimate recipient of a large payment for construction services whisked away $700,000 of city construction funds into a hacker’s bank account instead of the account of the contractor performing their work.
Many business owners have resisted the idea that they are vulnerable to losing significant amounts of money as a result of cybercrime or data breach. “We don’t process any payment information. We don’t collect any sensitive personal identifiable information. We don’t use electronic funds transfer. Our IT professional has our system locked down tight.” While many of these statements may be true, it is just a matter of when, not if an event occurs. Unless no one is using your system internally and no one is using your system externally, you can be a victim due to just one mistake or error by one user or employee on your system. If like many small businesses you outsource your IT work, are they really as good as you believe them to be? Some forensic experts tell us that many IT “pros” actually have created more vulnerability than you may be aware of. After all, that industry is wide open from a credentialing standpoint. Remember, it is not If you are attacked, it is only a question of When.
It is time to rethink the cost to your business of something as small as a single record data breach, a full lock down ransom ware demand, or the draining of your payroll account on a Friday afternoon of payday. The cost to hire forensic consultants (and find them timely), the lost business income from even a day or two of lockdown, or the cost to notify and provide credit monitoring of your entire data base for the next two years is best transferred to an insurance carrier for a known fixed cost (premium).
Coverage has never been broader, and premiums have never been lower. You can now obtain a proposal and obtain coverage in less than 15 minutes with less than a dozen underwriting questions. The cumbersome application and approval process has given way to sophisticated underwriting and pricing algorithms for less cost that you may have thought.
Send us an email and we will send you a direct invite to the quoting platform that will allow you to enter basic information on your own and obtain a proposal and issue a policy in less than 15 minutes. Minimum premiums start at less than $700.
As I drove home from my third non- profit board meeting of the month, I had a moment to reflect upon this past Friday “crunch day” and the final results we delivered today to a new non-profit client we secured with a cold call two weeks ago. A mission of rescuing and sheltering female victims of human trafficking is a cause that anyone can appreciate. I believe that call was more than a chance at obtaining a new client and additional revenue for our office. Just as the risk manager within me won’t allow me to walk away from a spill on the floor of the grocery store, the call I made to this organization must have been rooted in a desire to reach out and help them (in this case to improve their workers’ compensation program and conserve some of their precious money). With time and information NOT on our side as I preached several weeks ago, we still made it happen and they are very grateful.
Many non-profits don’t have the resources to engage high level advisors, attorneys, accountants, business developers, etc. This can impair their growth and halt them in their tracks if they don’t get that critical support or counsel. By serving them as a target client, and understanding their needs as a business but more importantly as a cause-driven organization, we are able to maximize our value as an insurance advisor that they can count on. Many times, they are surprised to learn they needed our expertise more than they realized. The end result is a much more stable and mission successful organization. And for us, fulfillment that we are serving them with a purpose beyond the monetary value we receive. It truly sets the stage for us to serve these humanitarian angels outside of the office as well.
I am blessed that my partner (as well as my lovely wife) has a heart of gold and years and years of hands-on experience as a non-profit administrator. She has taught me not only how to give more to receive more, (more in this and most other cases is gratification) but to make the time to get involved even when you think you have other priorities. The mental trade off of giving up work time (which as a small business owner comes without a paycheck while out) for charitable purposes has always haunted me. But as I have matured and served, it has become much easier and certainly more fulfilling than going home early to sit on the couch and watch TV. I still somehow find time to enjoy my craft of cooking a nice meal for the two of us each evening and feeling very good about the day and its successes as we sit down and thank God for another great day.
If you have been putting off that invitation to serve, regardless of the cause, get off the sidelines as I have finally done, throw your hat in the ring and get involved. You will be glad you did and those that you serve will receive exponential value from your generosity and your time.
We have been looking to hire a key employee recently and I know what I am looking for when it comes to experience and qualifications. In the title question I pose here, I am not talking about semantics. It really is a question that needs to be considered to ensure a mutually beneficial long term relationship between the employer and the employee.
The obvious starting point is to determine what your expectations are of the best qualified prospect. Qualifications are easy to identify and define, but to determine and define the qualities of the right prospect is much more difficult but much more important.
As we sift through the applicants that indicate they have 5 years of commercial and customer service experience, we have our pool of the best qualified. Now keep in mind that applicants can be pretty creative when it comes to describing their experience that meets this 5 year criteria. Beyond this hard statistical data, the difficulty comes with figuring out who matches that magic definition of “right”.
For our operation, the criteria for the right employee includes the following:
1. More excited about starting the work day rather than finishing it
2. Passionate about the business (Insurance)
3. Confident in their current abilities
4. Confident in their ability to grow and learn
5. Open and willing to listen and be mentored
6. Thirsty for more; not satisfied with “the way things are”
7. Willing to challenge, question and drive improvement
I have intentionally left out the “warm and fuzzy” stuff. Yes, finding a candidate that fits our culture and shares our values is important, but that is a given; they must be comfortable in our shoes as well as their own and that is an easy read right from the first interview.
Now the biggest challenge is determining who has these qualities and attributes among those that have the qualifications. Currently we are using a series of questions and “challenges” to gauge the depth of the candidate’s thirst for acquiring more knowledge and expertise as well as their progression of growth through the course of their career in our business. We are looking forward to the next few years as we measure the success of having chosen the Right candidate, not just the best qualified.
Business Insurance Online: Is it right for you?
There are many online business insurance platforms available for those owners that are tech savvy and comfortable at the keyboard. I recently blogged about buying auto insurance online and now it is time to evaluate the purchase of business insurance through one of the most popular online purveyors of that coverage.
This particular insurance company also partners with wholesale brokers and those brokers make the platform available to licensed agents essentially offering agents (like us) a market for placing their small business clients. The platform is identical to that which a business owner would access except that the branding of the quote has the agent’s contact information so that when the quote is presented to the client, they are directed to me to finalize the quote and issue of the policy.
The good news is that the information required is minimal. The issuance process is quick if you are able to provide a credit card number for either a monthly re-occurring credit card transaction, or one annual payment. No checks in the mail here….
The bad news is, you don’t have an opportunity (other than the “14 DAY FREE LOOK” period) to review the actual policy form / exclusions / endorsement prior to saying “yes”. While the endorsements are few which is a positive, you cannot get an advance copy of all of the policy terms and provisions and endorsements prior to issuance of the policy. It has been my experience that for most owners, they are not much interested in all that “technical” stuff anyway. That is where we come in. Our forensic review of their risk exposures and how well their current policy (in this case, bought online / simple issue) or our proposed insurance policy matches those risks determines in most cases, the owner should care about that “technical stuff”. It is that stuff for example that excludes the coverage for the recent claim that was denied unbeknownst to them. And that stuff is where you learn that the deductible is on a per “claim” basis not per “occurrence”. (10 cars damaged by contractor’s overspray = 10 $1000 deductibles or $10,000!) Or your contractor’s liability policy excludes work you do on multifamily properties. And the list goes on……
So what is your beef Dennis if it is easy to apply for and simple to issue? Well, after attempting to provide the up-front review of coverages prior to recommending what appeared to be a pretty decent policy of coverage at a decent price through this platform, I spent 3 hours and 5 phone calls to this “direct” to you insurance company only to learn that they were not able to provide me a copy of all the exclusions and endorsements without actually purchasing and issuing the policy! I gave up. I knew that I was not going to propose an insurance program with my name on it if I was not clear and certain what is covered and most importantly, what is NOT covered. End of story here for me.
Stay tuned. Later this year Berkshire Hathaway Insurance Company and it’s owner Warren Buffet who brought us the green lizard that saves you 15% for online auto insurance, promises to deliver an online business insurance solution that combines all coverage in to one single policy: General Liability, Business Auto, Business Property and Workers’ Compensation in one less than 5 page easy to read policy! The claim is it will be at least 15% cheaper than separate policies bought through an agent. Quite frankly, I believe our expertise, experience and delivering business peace of mind© is worth 15% and so do our clients.
If you are unfamiliar with this insurance policy exclusion and provision or coverage options, you may be in for a big surprise. That surprise could be the cost to replace as much as 50% or more of your damaged building out of your pocket rather than from insurance proceeds.
What exactly is it and why do I need it? Simply stated, if your building or home is not built to the CURRENT building standards, laws or ordinances in your area, then you may be required to bring all or some of that building up to the current codes if even only a portion of it is damaged when you rebuild it. In some municipalities, if more than a certain percentage of the building is damaged (say 50%), then you would be required to replace or update the entire building to the current codes. Hmm… what if half of the building is undamaged? Who pays for the teardown, replacement cost of that portion, and the increased cost to bring the older, less expensive construction design and materials up to code?
EXAMPLE:
Current “replacement cost ” of the building is $500,000 and it is 2000 sq. ft. The building was built in 1980 long before most of the current wind resistant and energy efficient designs and codes were enacted. The building sustains damage to 40% of it from a hurricane. $200,000. (800 sq. ft.) $200,000 is how much your insurance policy will pay to replace it. However, that same 800 square feet of building now needs heavier copper wiring, plumbing upgrades, efficient air conditioning and substantial wind resistance in the structure and the roof which will cost $400,000. Oh, oh… you are $200,000 short of insurance money now.
Same scenario, but now 60% is damaged, (1200 sq. ft) and $300,000 of value. Now you will have to spend $600,000 replacing the same 1200 sq. ft. but since more than 50% of the building is damaged, the municipality requires you to tear down the other 40% and rebuild the entire 2000 sq. ft. to code! Demolition costs are $25,000, $200,000 of your insurance coverage will not come into play since that part of the building was NOT damaged, and now you will have to pay double the cost per sq. ft. to bring the entire building up to code. Ouch!!
Here are the Ordinance and Law coverages broken down that you need to pay attention to:
Coverage A – Undamaged Portion of the Building
Coverage B – Demolition
Coverage C – Increased Costs of Construction
A closer look tells us that under “A” you can have coverage that will pay for the replacement of the undamaged portion that you must tear down even though it is not damaged. “B” covers the extra cost to demolish and remove that undamaged portion. And “C” pays that extra cost to bring everything up to code. The least of which is the tear down cost and the other two weigh in pretty equally on the critical and cost scale.
How much is enough for each of these coverage parts? For “A” it should equal the full value of the building. For “B” you need to determine the extent the demolition, how it will be hauled away (on an island and by barge or other expensive means) and how / where it has to be disposed of. And finally for “C” you will need to determine how old the building is, what the current codes may be at the time of loss (future?) and the extent of what the cost will be to upgrade all these features. What is needed is a guestimate that requires knowledge of construction costs and the current building codes and laws.
In conclusion, don’t automatically decline this option or accept a proposal without it unless you make that cost / benefit decision. It is not inexpensive, but paying double out of your pocket to replace your building or dwelling is not inexpensive either. It matters not what your premium is (low or high) if at the time of a loss your policy does not pay that which you expect it to pay. Engage your insurance professional to advise and assist you with the selection of this important coverage element. Also keep in mind that while most property policies exclude Ordinances and Laws mandating repairs, this and most other coverage provisions can only be determined by the contract itself and can be very detailed and complicated; all the more reason to engage a professional. (See last week’s blog)
- Excess liability policy that excluded some of the types of work they perform. No coverage over auto liability policy. Replaced
- General Liability policy that excludes primary work they perform and rated improperly for 10% of actual payroll. Replaced with no exclusions of their type of work.
- Workers’ compensation:
- Missing Safety Credit. added
- No drug free workplace credit offered. In the process of implementation
- Missing experience modification factor of 19% discount
- Payroll estimate not updated at renewal by over 100%
- No “pay as you go” option offered. To be added at next renewal
- No dividend plan added at renewal for potential 27% return (no claims through 9 months) To be added at next renewal
- No assistance with $20,000 audit dispute from prior year. Successfully challenged
- Business auto policy rated up so high that proper limits unaffordable. Carrier change and increased limits to $1M for the same premium and included physical damage on 18 additional vehicles
I can be certain you likely trust your professional advisers, but can you count on them to ask the right questions of the insurance carriers, brokers or underwriters while understanding your needs and how to properly protect your business? Forty years of experience and technical lessons for learning, translates into business peace of mind.
Our promise is to treat our client’s money as if it were our own. That is a promise, not just s slogan.
